Dutiability of "Interest" Payments

HQ 544580 March 1, 1991 VAL CO:R:C:V 544580 VLB CATEGORY: Valuation District Director of Customs 10 Causeway Street Boston, Massachusetts 02222 RE: Dutiability of "Interest" Payments Dear Sir: This is in response to your memorandum (ENT-3-0:RA EJS) dated August 8, 1990, forwarding a Request for Internal Advice on the dutiability of payments made by BASF Corporation Information Systems (hereinafter referred to as "the importer") to its supplier BASF AG of Ludwigshafen, Germany (hereinafter referred to as "the seller"). FACTS: As you know, the issue of the dutiability of purported interest payments made by the buyer to the seller arose out of an audit conducted by Customs in 1987. At that time, the Regulatory Audit personnel in the Northeast Region requested internal advice on the dutiability of the payments. On December 16, 1988, Customs issued Headquarters Letter Ruling (HRL) 544155. In the HRL, we held that the the importer payments to the seller met the requirements of T.D. 85-111, which at the time was the only applicable statement by Customs on determining the dutiability of payments that were allegedly interest payments. Subsequently, on July 17, 1989, Customs published a Statement of Clarification for T.D. 85-111 (54 FR 29973) ("the Clarification"). In the Statement of Clarification, Customs stated that for purposes of T.D. 85-111, "the term "interest" encompasses only bona fide interest charges, not simply the notion of interest arising out of delayed payment." Customs further added that "bona fide interest charges are those payments that are carried on the importer's books as interest expenses in conformance with generally accepted accounting principles". The Clarification became effective on October 16, 1989, which was ninety days after the Clarification was published in the Federal Register. - 2 - By letter dated August 15, 1989, counsel for the importer stated that the importer was concerned about the impact of the Clarification on HRL 544155. Counsel requested that Customs "confirm in writing that the Statement of Clarification does not in any way alter the effectiveness of the ruling". Counsel subsequently withdrew this request before Customs ruled on the issue. ISSUE: Whether the Statement of Clarification for T.D. 85-111 applies to the importer's entries on or after October 16, 1989. LAW AND ANALYSIS: Counsel for the importer contends that "[t]here have been no changes in the operative facts or controlling law which would justify a departure from the decision taken in [HRL] 544155". In addition, counsel states that its reading of the Statement of Clarification indicates that the Clarification was not intended to replace or supersede the criteria coverning the dutiability of interest charges, as published in T.D. 85-111. Finally, counsel asserts that there is nothing in the Statement of Clarification indicating that Customs intended to modify or revoke the decision in HRL 544155 on the dutiability of the importer's payments to the seller. Under 19 CFR 177.9(d), any ruling letter that is not in accordance with the current view of the Customs Service may be modified. The modification is effected by Customs Headquarters giving notice to the person to whom the ruling letter was addressed, in this case the Deputy Assistant Regional Commissioner for the Northeast region, and if necessary, by the publication of a statement in the Customs Bulletin. In this case, the publication of the Statement of Clarification provided notice that Customs would require specified evidence from importers who are claiming a deduction under T.D. 85-111. In HRL 544155 Customs did not address the Clarification because the Clarification had not been issued. Therefore, HRL 544155 is not in accordance with the current view of the Customs Service and must be modified to encompass the applicability of the Clarification. - 3 - As a result, the question of whether the importer meets the evidentiary requirements set out in the Clarification must be examined. As previously discussed, under the Clarification , bona fide interest payments are considered to be payments that are carried on the importer's books as interest expenses in conformance with generally accepted accounting principles. The importer in this case does not book the payments to the seller as interest expenses. Therefore, the importer does not meet the evidentiary requirements that are set out in the Clarification. This approach is analogous to the Customs treatment of buying commissions. An importer can declare that it has bona fide buying commissions that should not be included as part of the price actually paid or payable. However, if requested, the importer must produce an invoice or other documentation from the foreign seller to the agent that establishes that the agent is not the seller and that the payments are bona fide buying commissions. If the importer cannot meet the evidentiary requirements, then the purported buying commissions are not considered to be bona fide buying commissions. As previously discussed, 19 CFR 177.9(d) contains the provisions for the modification or revocation of ruling letters. Under 19 CFR 177.9(d)(2) the modification or revocation of a ruling letter cannot be applied if certain conditions are present. One of the conditions is that the ruling was originally issued with respect to a prospective transaction. In this case, HRL 544155 was not issued with respect to a prospective transaction. Rather, HRL 544155 was internal advice that was issued to the Deputy Assistant Regional Commissioner for the Northeast Region with respect to completed transactions. The importer was clearly on notice of this evidentiary requirement contained in the Clarification, given the fact that its counsel submitted a letter inquiring about the impact of the Clarification on the importer's transactions. However, the importer chose to withdraw its request that Customs rule on the applicability of the Clarification before Customs could rule. In sum, HRL 544155 is modified to include the application of the Clarification as discussed in this letter. The modification is effective as of October 16, 1989. - 4 - HOLDING: The Statement of Clarification for T.D. 85-111 applies to the importer's entries on or after October 16, 1989. HRL 544155 is modified to incorporate the application of the Statement of Clarification. Sincerely, John Durant, Director Commercial Rulings Division